How do brokerages earn money? | Forex Factory

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How do brokerages earn money?

  • #1
  • First Post: Edited Nov 3, 2016 12:30pm May 26, 2015 8:59pm | Edited Nov 3, 2016 12:30pm
nil
  • #2
  • May 26, 2015 9:53pm May 26, 2015 9:53pm
Depends on the type of brokerage. I've never worked for one, but this is my understanding.

1. They earn off commissions.
2. They earn by trading against their clients. e.g. If you're a small account or regularly losing etc, they won't actually put your position out into "the market", but rather they will take the opposite side to your trade, thus profiting while you lose.

Obviously there's a conflict of interest on number 2, but that's why it's important to choose a reputable broker.
  • #3
  • May 26, 2015 10:01pm May 26, 2015 10:01pm
Quoting scottik187
Depends on the type of brokerage. I've never worked for one, but this is my understanding. 1. They earn off commissions. 2. They earn by trading against their clients. e.g. If you're a small account or regularly losing etc, they won't actually put your position out into "the market", but rather they will take the opposite side to your trade, thus profiting while you lose. Obviously there's a conflict of interest on number 2, but that's why it's important to choose a reputable broker.

Thanks for the insight... So whose money am i actually earning or withdrawing if im profitable? Correct me if im wrong, but the way i see it, a brokerage is merely a more sophisticated and advanced money changer which dazzle us with live prices and chart movements. When we go to a moneychanger to exchange currencies to our advantage, the moneychanger is the one that actually forks out the loss. thus is it correct to say the same applies to the brokerage industry and in actual fact the im not trading the market, but my broker?
  • #4
  • May 26, 2015 10:05pm May 26, 2015 10:05pm
Quoting Bicarus
As title described, how does a brokerage earn money. i found an article online which says that in actual fact they do not earn off spread. now that doesnt make sense to me. link to the article : http://www.tradingmarkets.com/recent...ey-839961.html and given the fact that forex is meant to be a "zero sum game", when i make money thru trading and submit a withdrawal from my brokerage, whose money am i actually withdrawing? the market participants(other traders that lost) or the broker's.
They also earn the spread on the swap rates as well as the interest on the deposit on their "segregated account" with all of our deposits (that's another reason why they don't want you to withdraw). And I suspect that they also earn some kind of kickbacks on those payment processing method that they insist on you using.
Make your losses in demo. Earn your profits live.
  • #5
  • May 26, 2015 10:08pm May 26, 2015 10:08pm
Quoting Bicarus
{quote} Thanks for the insight... So whose money am i actually earning or withdrawing if im profitable? Correct me if im wrong, but the way i see it, a brokerage is merely a more sophisticated and advanced money changer which dazzle us with live prices and chart movements. When we go to a moneychanger to exchange currencies to our advantage, the moneychanger is the one that actually forks out the loss. thus is it correct to say the same applies to the brokerage industry and in actual fact the im not trading the market, but my broker?
If your broker operates in a market maker model then yes you would be correct, you are NOT trading the "market" and really trading against the broker, i.e. you lose they win and they win you lose. But if your broker operates in an "ECN" model, you COULD BE trading on the "market".
Make your losses in demo. Earn your profits live.
  • #6
  • May 26, 2015 10:15pm May 26, 2015 10:15pm
Quoting Forexia
{quote} If your broker operates in a market maker model then yes you would be correct, you are NOT trading the "market" and really trading against the broker, i.e. you lose they win and they win you lose. But if your broker operates in an "ECN" model, you COULD BE trading on the "market".
Exactly.

From what I've read brokers put people into two categories, the winners and losers.

Loser trade with the broker, thus all losing trades = money in brokers pockets
Winners get passed through to the market = broker makes money on commission/swap/spread etc.

If a loser becomes a winnner they get moved over.

Obviously this is oversimplified, they hedge positions and all that stuff, but that's the general jist of it I believe.

But really, unless you're trading big money I wouldn't worry about it if you're using a good broker.
  • #7
  • May 26, 2015 10:19pm May 26, 2015 10:19pm
I'm also curious about whether fx brokerages business is that good money. The number of of fx brokerages which are around and with new ones appearing now and then seems far exceed the brokerages which deal with stocks and futures.

You even have companies which help you start a fx brokerage by providing all the backend engine and front end platform.

I have read/heard for many years fx brokers trade against you and they all hope you lose so they can win. I suspect as the fx industry matures and with intense competition, this business model is not sustainable. Yes, it can still be the an income source but it can't be the only one.

Their main income should be built around earning from spreads and swap instead. First of all, these 2 revenue sources are almost risk free for them ( unless something like the EUR/CHF peg happens) Secondly with intense competitions, how long can betting against your customers be sustained? The most likely customers who will trade with you long term are the profitable traders which means brokerage should earn money off this group of traders (via spreads and swap) and keep them happy trading with the brokerage.
  • #8
  • May 26, 2015 10:46pm May 26, 2015 10:46pm
Quoting Forexia
{quote} They also earn the spread on the swap rates as well as the interest on the deposit on their "segregated account" with all of our deposits (that's another reason why they don't want you to withdraw). And I suspect that they also earn some kind of kickbacks on those payment processing method that they insist on you using.
guess you were right. managed to dig up their t&c
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  • #9
  • May 27, 2015 12:10am May 27, 2015 12:10am
Quoting shibboleth
I'm also curious about whether fx brokerages business is that good money. The number of of fx brokerages which are around and with new ones appearing now and then seems far exceed the brokerages which deal with stocks and futures. You even have companies which help you start a fx brokerage by providing all the backend engine and front end platform. I have read/heard for many years fx brokers trade against you and they all hope you lose so they can win. I suspect as the fx industry matures and with intense competition, this business model is not...
You are absolutely correct.
A 100% B-Book broker is taking a risk that the client will lose.
What happens when they dont ?
Like history suggests they leave town in a hurry
  • #10
  • Edited 1:44pm May 27, 2015 1:44am | Edited 1:44pm
Hi all
they have many ways
actually they can make a lots of money
1-commission from both clients and liquidity provider .
2- spread from both clients and liquidity provider .
3-interest from client money hold at there custody and positions taken by client .

so they can make good money
all have a nice day
focus while relaxed to see better
  • #11
  • May 27, 2015 2:49am May 27, 2015 2:49am
Quoting orabi
Hi all they have many ways actually they can make a lots of money 1-commission from both clients and liquidity provider . 2- spreed from both clients and liquidity provider . 3-interest from client money hold at there custody and positions taken by client . so they can make good money all have a nice day
hi orabi, i think the gist of my question is where is my profits coming from actually. is it truely direct from the market or brokers (irregardless of whether the broker is an ecn or market maker model) whose money am i gaining if i make a withdrawal. For those that have never read your brokers terms and conditions i would suggest u all to do so cause some points i found alarming. as shown below.. using other clients money in the pool to pay out profits? say if SNB happened again and this time everyone was on the winning end, guess they too might file for insolvency as they cant pay everyone if everyone is a winner. based on this t&c im really questioning if orders do really do go into the market and do profits come out from it.
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  • #12
  • May 27, 2015 3:03am May 27, 2015 3:03am
Quoting Bicarus
{quote} hi orabi, i think the gist of my question is where is my profits coming from actually. is it truely direct from the market or brokers (irregardless of whether the broker is an ecn or market maker model) whose money am i gaining if i make a withdrawal. For those that have never read your brokers terms and conditions i would suggest u all to do so cause some points i found alarming. as shown below.. using other clients money in the pool to pay out profits? say if SNB happened again and this time everyone was on the winning end, guess they...
Good points
I never read all the agreements but i pass though some of it fast .
I believe that there is a process called account clearing and there are brokers that offer clearing accounts like fxbaxter
The money then is used for margin but the clearing appear after two days and if you made money you get it but such type for big accounts and large volume trading so actually there is a market if there was not alpari could not suffer insolvency and lost money so there is a market but we are mostly trading with small amounts so our clearing do appear but according to broker policy does he counter positions or pass it to be cleared later after two days with his liquidity provider and your position size i think
i managed several big accounts ranging from 100 kilos to 500 kilos and clearing appears after two days of closing your positions .it was great days
have a nice day please
focus while relaxed to see better
  • #13
  • May 27, 2015 4:08am May 27, 2015 4:08am
Quoting Bicarus
{quote} hi orabi, i think the gist of my question is where is my profits coming from actually. is it truely direct from the market or brokers (irregardless of whether the broker is an ecn or market maker model) whose money am i gaining if i make a withdrawal. For those that have never read your brokers terms and conditions i would suggest u all to do so cause some points i found alarming. as shown below.. using other clients money in the pool to pay out profits? say if SNB happened again and this time everyone was on the winning end, guess they...
This is interesting, I never thought about it until now

Suppose a brokerage has 3 customers each deposit $1000

A - $1000
B - $1000
C- $1000

Total - $3000 in broker bank account

After 2 months of tradings -

A - $950
B - $1100
C - $800

Total - $2850 belong to the customers, $150 broker profit in MM model

Plus interest $10 from the bank for the deposit

Suppose it is an ECN model, the broker would have income from commission. And the P/L of each trader is from the market; the broker pays you from the market or take money from you to pay the market by passing your orders to the liquidity providers

But if it is the MM model, the profit is indeed mostly from the customers' money pool except interest from the bank. it seems then the MM broker must not have most of the traders profitable.

Any thoughts?
  • #14
  • May 27, 2015 3:59pm May 27, 2015 3:59pm
Although a lot of people do think that market makers simply trade against their clients, this isn't true for all of them. A lot still simply make money on the spread. They basically hedge against your trade.

For example, you go LONG on GBP/USD. They take the other side, so they are short GBP/USD. They will then initiate their own BUY on GBP/USD, thus effectively breaking even.

Because they have much more capital and will have agreements with their prime brokers / LP's etc, they simply get better spreads than what are offered to clients. Closer to the raw spread. So whether you make money or lose money is irrelevant.
  • #15
  • May 27, 2015 6:03pm May 27, 2015 6:03pm
Quoting shibboleth
{quote} This is interesting, I never thought about it until now Suppose a brokerage has 3 customers each deposit $1000 A - $1000 B - $1000 C- $1000 Total - $3000 in broker bank account After 2 months of tradings - A - $950 B - $1100 C - $800 Total - $2850 belong to the customers, $150 broker profit in MM model Plus interest $10 from the bank for the deposit Suppose it is an ECN model, the broker would have income from commission. And the P/L of each trader is from the market; the broker pays you from the market or take money from you to pay the...
Lets get our terms right here ..

That's a B-Book model.

Market making (MM) is permitted because the broker can widen the spread to allow for commission to be charged but those trades can still go to market.

B-Book is where no trades go to market and the broker takes the risk.
  • #16
  • Last Post: May 29, 2015 11:38pm May 29, 2015 11:38pm
hi
i am the beginner. i was just wondering whats the difference between floating spread and fix spread? and what do you prefer ? and why?
your reply would be much appreciated.
thanks
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